In 1983, the American Trucking Associations, Inc. (ATA) challenged the flat tax portion of Arkansas' Highway Use Equalization (HUE) tax, alleging that it violated the Commerce Clause. The Arkansas Supreme Court, relying on Supreme Court precedent, rejected this claim. Subsequently, on June 23, 1987, the Supreme Court decided American Trucking Ass'ns., Inc. v. Scheiner, 483 U.S. 266 (1987), which held that state application of flat highway use taxes was unconstitutional. Pending re-hearing in the Arkansas Supreme Court, Justice Blackmun ordered, in August 1987, that all new taxes collected be kept in escrow. Subsequently, the Arkansas Supreme Court held that HUE was unconstitutional, but that Scheiner did not apply retroactively. The court went on to decide that taxes already collected for the tax year beginning July 1, 1987, could remain in the state treasury, but that those funds placed in the escrow account ordered by Justice Blackmun should be refunded, as they had not been spent or budgeted for future spending.

Question

(1) Does the Court's decision in Scheiner apply retroactively? (2) Even if the Scheiner decision does not apply retroactively, can the state keep taxes collected before the escrow account was established when those taxes are for the tax year July 1, 1987 to June 30, 1988, a period after Scheiner?

No and no. A plurality of the Court held that Scheiner did not apply retroactively, and that state collection of taxes for the tax year beginning July 1, 1987, before the establishment of the escrow account, was unconstitutional. Applying the test of non-retroactivity articulated in Chevron Oil v. Huson, 404 U.S. 97 (1971), the Court found that Scheiner clearly established a new principle of law; that the purpose of the Commerce Clause did not support retroactive application; and that equitable considerations weighed heavily against retroactivity. The Court went on to reverse the Arkansas Supreme Court's decision not to refund taxes already collected for the tax year beginning July 1, 1987, reasoning that the conduct to which Scheiner applied prospectively was the use of the highway, not the payment of money therefor. Justice Scalia concurred in the result, but disagreed with the plurality's retroactivity analysis. He found that the only reason to follow Scheiner, which he believed to be wrongly decided, was the doctrine of stare decisis, which only applies prospectively.

I'm afraid I'm inflicted with laryngitis today and I ask the Court's patience with me although you should certainly feel free to ask questions, but I may be a little slow in responding to them.

We've just heard an interesting argument on the perplexing question whether and under wh circumstances federal law may require refunds of constitutional state taxes.

It's useful to have in mind in approaching this case why that question is important to McKesson but not here. The difference in the two cases is not based on the clearly-established law factor because in this case too we have the second issue, the post-Scheiner tax collections which I think plainly violated clearly-established law laid down in Scheiner.

In fact, the difference between our case and McKesson is that our case was a true retroactivity case and I don't think McKesson is. Now, the best way to sum up this difference is that retroactivity tells you what substantive law governs a case, whereas, the law of remedies assumes that there has been a substantive violation and asks what type of relief is appropriate.

So, the Florida Supreme Court's basis for its decision in McKesson I think had nothing to do with the notion that there had been a change in law and that Florida was entitled to rely on some prior rule of law.

Rather, the court held that even though the statute may have been clearly unconstitutional from the very moment of its enactment, McKesson was not entitled to refund relief because of the nature of injury or lack of injury that it suffered by virtue of the Commerce Clause violation.

Now, whether the Florida court was talking about state or federal law when it was making that ruling, you can overturn that ruling only by finding that there is a federal right to some refund relief in the circumstances of the McKesson case.

In our case, however, the ruling of the Arkansas Supreme Court that the interstate truckers should not receive refunds of pre-escrow tax payments is based on a non-retroactivity determination under this Court's Chevron test.

What the Arkansas Supreme Court effectively held is that Aero Mayflower provides the substantive Commerce Clause rule that would govern Petitioner's refund claims until August 14th, 1987 when Justice Blackmun entered his escrow order, and that the principles of Scheiner would be applied to HUE taxes collected after that date.

This is not in any sense a ruling that unconstitutional state highway taxes are not refundable in Arkansas because of sovereign immunity, or for any other reason. Quite to the contrary. The fact that post-escrow tax payments were refunded, shows that Arkansas law does give petitioners a right to refund of taxes to which the principals of Scheiner are applicable.

The refunds were denied here because in effect the highway tax at issue was treated as having been constitutional prior to the time of Justice Blackmun's escrow order.

Now, contrary to the arguments of respondents and their amici, the question of which substantive Commerce Clause governs here, the Aero Mayflower rule or the Scheiner rule, is surely one of federal law. And while retroactivities and right to refunds may be related from a practical standpoint, the choice of the proper substantive rule is conceptually quite distinct from the question of whether a violation of federal law gives rise to right to refund.

So, with that underbrush I hope cleared away, let me turn to the retroactivity question in our case.

QUESTION: Do you think -- do you think that Arkansas makes any different claims now on reargument?

MR. FREY: From what it did before?

QUESTION: Yes.

MR. FREY: I think it has a -- an argument based on Union Gas and the powers of Congress and the powers of this Court, which I think is new. Otherwise, I think it's largely rearguing Scheiner, which I think is what it did before, on the merits of the retroactivity issue.

Now, I'm going to talk in terms of the Chevron test because that is the test that this Court has devised for deciding whether a given rule is substantive federal law, and by this I include such things as statutes of limitations for this purpose, which was what was at issue in Chevron -- what applied to events that occurred prior to the date of the case that decided that rule of law.

The first thing I want to say about it is that in the particular context where the proponent of non-retroactivity is the government, this Court has had some revealing things to say on that subject in the Owen case. I understand the Owen case involved municipality and not the state, and it involved the statutory right under 1983, but the way the Court went about identifying the question whether there should be an obligation to make the citizen whole for a violation of his constitutional rights, even where it was not clear at the time the government action took place that it was illegal, is illuminating in our case.

And, indeed, if you look at the state's briefs in this case, you will find that Owen is nowhere cited or discussed in their briefs.

Now, the Chevron test identifies three factors that go into the retroactivity analysis.

QUESTION: May I just interrupt for a second, Mr. Frey. You make a big point of the fact that government is a proponent of non-retroactivity. Of course, that's typical in all criminal retroactivity cases, that the government is always -- always the proponent of non-retroactivity.

MR. FREY: And the criminal rule is that -- is now that all decisions are fully retroactive to cases that are pending on direct appeal.

QUESTION: Do you argue for such a rule here?

MR. FREY: Excuse me?

QUESTION: Do you argue for a comparable rule here?

MR. FREY: No, we don't. We don't. I think what we are actually saying -- we are not asking the Court, and we don't think the Court needs for this case, to go so far as to say that the government always loses when it's seeking non-retroactive application of some constitutional rule.

We do say that if you look at a case like ours in which the rule is arguably new and arguably not new, foreshadowed but -- and the state is able to say it wasn't clear that we were acting unconstitutionally when we acted and, therefore, we shouldn't have to apply the new rule to the old case -- I think Owen gives grounds for healthy skepticism about that argument. It's a factor that weighs entirely --

QUESTION: The question I'm raising is -- I suppose there are always two questions. One, is it retroactive, and if so, from what date? And, secondly, what does that mean? Does it mean that the tax is paid before the date or the highway is used before the date or cases pending on the date? There are a lot of things that can fall from that.

MR. FREY: I think in that -- in the tax --

QUESTION: I'm not quite clear what the position is here.

MR. FREY: Well, I will tell you what -- our position is that if it were non -- if it's retroactive, it's presumably retroactive to any cases that are still under litigation or open under the statute of limitations where state procedural rules have been met and you're suing for a refund.

If it is partially non-retroactive, which is our second issue, the post-Scheiner payments, we would say that the question is when did the transaction occur that was subject to the tax -- before or after the new rule? So, if the tax is imposed for highway use after June 23rd, 1987, we would say that that's not a question of retroactivity. That's a refusal to give prospective effect to Scheiner.

There are three parts to the Chevron test. The extent of justifiable reliance on the old rule -- and I've talked a little bit about that; the extent of the policy that underlies the new rule, if, indeed, we have a new rule; and the equitable considerations.

And let me talk first about the equities because I think they're quite striking in this case and quite easily misunderstood.

First of all, the Court has made clear that the burden of persuasion with respect to the equities is on the proponent of non-retroactivity because the normal presumption is retroactivity. In a case like this, there are two aspects to the equities.

The first is whether it would be inequitable not to apply the rule retroactively? That is, the equities of the taxpayers. And, on the other hand, would it be unfair or severely burdensome to the state to apply the rule retroactively? That is, the equities advanced by the state. Now, in this case both of these factors favor our position.

Let me look first at the impact of refunds on the state. We're dealing here with taxes that are paid into a highway trust fund dedicated for the purpose of highway repairs and maintenance, and paid by highway users.

What happened under the old tax was that the interstate truckers -- that is, the members of the plaintiff class by and large -- were required to pay more tax than was necessitated by their own operations on the highways. They were required to pay a tax to cover the operations of the instate operators who were getting a free ride because of the flat feature of the tax.

If -- if refunds end up being ordered in this case, it's perfectly clear that those refunds will be financed by new truck taxes. But those new taxes will have to be non-discriminatory, and the effect of funding the refunds by non-discriminatory new taxes is to redress the past discrimination by making those who were unjustly enriched by the unlawful features of the tax repay those who were its victims.

In addition, the burden on the state of the -- having to make a tax refund is -- can easily be and is exaggerated by my opponent because he refuses to consider the possibility of stretching out the refunds over a period of years using credits, using bonding as a means of financing the refunds and spreading out the impact.

On the other side of the equation let's look at it from the standpoint of the taxpayers. While the Arkansas Supreme Court suggested that there was a windfall to petitioners, we believe it's quite clear that there is no windfall on either of two grounds.

One ground that was offered was that we, after all, got to use the highways that were improved with the tax monies that we paid. And, of course, that's true and we are not seeking -- we don't say we have a right to a refund of our fair share of taxes. That is, the taxes that were fairly related to our highway use.

The problem here is that we were asked to pay taxes for their highway use, and it seems to us that from an equitable standpoint, there is no excuse for not making us whole, particularly when the money is going to come out of the pockets of --

QUESTION: Do you see a difference between the tax you paid and what the people who paid lower taxes paid?

MR. FREY: We've suggested in our briefs that there are two different ways that you could measure it. There are actually three ways. You might get a full refund. We do not say federal law --

QUESTION: What did they -- what did they refund for the period --

MR. FREY: After the escrow? They ordered full refunds.

QUESTION: Of all the -- the complete --

MR. FREY: Of all, yes.

QUESTION: That's more than you think you are demanding, or not?

MR. FREY: It's more than we say federal law would require.

QUESTION: Yeah, but the state -- the state, as it comes to us, seems to --

MR. FREY: The state is --

QUESTION: -- say that the -- that the remedy is a refund if there is a discriminatory tax that is retro -- and Scheiner is retroactive.

MR. FREY: This is why what the state can't do is, as I think Justice Stevens makes quite clear during the preceding argument, is they can't -- like the orphan who killed his parents and pleads for mercy, they can't say, well, the only remedy we have is a full refund and it would be unequitable to give a full refund so we're going to give nothing.

QUESTION: Yes.

MR. FREY: I don't think that's an acceptable approach. And that was the second point that I was going to make, which was the suggestion that the refund -- to give us full refunds would be excessive.

This Court does not have to decide that question. The only question this -- that's now before this Court is what rule of substantive law governs our claim for refunds: Scheiner, Aero or Mayflower?

If Scheiner is the rule, then we go back to the Arkansas courts and we see what we're entitled to under the legal exactions provision of the Arkansas Constitution for a tax that violated our rights, that violated the Federal Constitution.

Now, the fact that we suffered a real and substantial injury in this case is undeniable and it's made clearest -- or, most simply made clear from the fact that when they were forced to pass a non-discriminatory tax that didn't have the flat feature, the rate was two and a half cents per mile even though more than three-quarters of the members of the plaintiff class paid the full five cents a mile under the old tax.

So, it's clear we were paying at least twice as much as we should have been paying.

Now, let me turn to the first prong of the equation. That is, the right to -- the question of whether there is a new rule, whether there was justifiable reliance by the state. And in this connection I think we need to remember that the general rule is full retroactivity, and prospectivity is meant to be a fairly rare exception.

QUESTION: Is -- is that based on Chevron?

MR. FREY: Oh, the Court has said that in many -- in many cases.

QUESTION: Well, in many civil cases?

MR. FREY: The Court has said it in many civil cases. I think we -- Schooner Peggy and Alkasrogi, and there are a number of other cases.

QUESTION: Well, but Schooner Peggy is not on all fours with this, I don't think. Chevron didn't put it -- when it was talking about retroactive application of the decision of this Court, Chevron didn't put it quite as liberally for your side as you say, did it?

MR. FREY: Well, I think Chevron is a -- is a -- if you compare Chevron with our case, I'm not sure whether I'm being responsive to your question.

QUESTION: No, I don't think you are.

MR. FREY: I don't know that -- I don't remember whether Chevron said -- although I think it did but I can't point out to you something now that suggested that retroactivity is the normal rule. But it clearly is the normal rule, and last term in the Rodriguez to (inaudible) case, which is at 109 Supreme Court 1917 and the discussion of retroactivity at 1922, that was a case where the Court overruled Wilco against Swan and it rejected a retroactivity argument. And, as I said, I believe that the normal rule is a rule of retroactivity.

Of course there are exceptions. If you look at the Chevron case, what happened in Chevron was that the prior case, Rodriguez -- it cut the statute of limitations back from three years to one, and Mr. Huston was caught not having filed his case. He was in that one to three year gap. The inequities were striking in a case like that. Nothing like our case.

I'm not saying that there is never -- that there is never a prospect of only application. I am saying that it's rare and that in light of Owen it should be even rarer when we're dealing with government constitutional violations.

QUESTION: Well, if in considering the remedy we are concerned about massive financial costs to the state, it might exert a kind of pressure on courts to find non-retroactivity.

MR. FREY: Well, let me say this, Justice O'Connor. I think it's fair -- I think that -- why I started the argument the way I did is that there may be reasons why the state should not have to -- or should not want to -- and be required to pay refunds.

I don't think the retroactivity test should be twisted as a way to be -- to concern itself with that. You ought to look at the law of remedies.

QUESTION: But you can see the pressure is mounting if the rule --

MR. FREY: I -- I --

QUESTION: -- is otherwise on what has to be refunded.

MR. FREY: What has to be refunded would be a different question from whether this tax violated the commerce clause at the time that the money was exacted or should be treated that way.

Now, I cannot agree, however, with the suggestion that at least in this area that we are dealing with massive -- that with massive amounts of liabilities. I note, following up on Justice Steven's suggestion, that in a previous case, while a whole lot of liquor tax was collected by Florida, it may be that the refund obligation would be very small. There would be something, but it might --

QUESTION: In fact, Mr. Frey --

MR. FREY: -- be quite small.

QUESTION: Mr. Frey, isn't it possible in this case -- I think the Arkansas Supreme Court did the same all-or-nothing approach. And they said, well, we'll chop it off at Justice Blackmun's escrow order and the refund will therefore be $4.9 million instead of a hundred and fifty or something like that.

Isn't it possible that under the different ways of computing the retroactive refund that you claim that you might even lose some money? I mean, is it -- is it clear -- this is getting to the -- they gave you $4.9 million, but you have these different formulas that might -- I don't know what the arithmetic is, but you don't really tell us how much might be at stake under your various approaches.

MR. FREY: Well, I don't think that that's what you are here to decide.

QUESTION: No, I know, but it --

MR. FREY: It may be that with respect to, let's say, the post-Scheiner pre-escrow money -- it may be that we would not get back 100 percent of that.

QUESTION: Well, you don't really -- I mean, you don't very vigorously argue for it in your brief, certainly.

MR. FREY: We don't ask this Court to rule that we're entitled to a hundred percent of it, no. So why should we very vigorously argue for something we're not asking you -- when we get back to the Arkansas Supreme Court, we'll take up with them --

QUESTION: But I -- but, I mean, I don't think you are arguing -- I think you're saying you might be entitled to it as a matter of Arkansas law. But you are not arguing, as I understand it, that federal law commands the refund of every dollar of tax paid. I don't think you're arguing that.

MR. FREY: We are definitely not. We have tried to make it clear that we are not arguing that both in our amicus brief and McKesson.

QUESTION: (Inaudible) if you were here.

MR. FREY: I don't believe we would argue here that federal law requires that. I mean, we have taken the position that federal law does not require that.

Let me just say I do want to save the remainder of my voice for rebuttal. But with respect to Justice Scalia's question on the Eleventh Amendment, we list about 57 cases in our appendix to our reply brief in this case, all of which I think fit the category of cases brought in state court where this Court has reviewed --

QUESTION: Are they all tax cases?

MR. FREY: The ones we list in the appendix are all tax cases. There are a few other benefit cases and so on, but these are tax cases.

QUESTION: Thank you, Mr. Frey.

Mr. Randolph.

ORAL REARGUMENT OF A. RAYMOND RANDOLPH ON BEHALF OF THE RESPONDENTS

MR. RANDOLPH: Mr. Chief Justice, and may it please the Court:

I would like to begin with an argument that is very prominent in petitioner's contentions here, and I think it reveals a good deal about what is really at stake here and what the issues are.

The petitioners have said time and again, not only in this case but also in their amicus brief in the companion case, that retroactive awards payable from the State Treasury of Arkansas are needed to deter, as they put it -- and I quote -- the impulses of the state legislators, impulses to violate the Commerce Clause. They say this is one of the reasons that we have to apply Scheiner retroactively.

Yet, at this late date, and even today, my opponent has sat down -- we have yet to receive an explanation of why the Arkansas legislature should be chastised for what it did in 1983.

As the Court will recall, at the time of the enactment of this tax, the outstanding decisions of the Court, the Aero Mayflower line of cases, were clearly in favor of the constitutionality of the tax.

More than that, the lower courts throughout this country -- that's both federal and state courts -- were bound to adhere to the Aero Mayflower line of cases. My opponent mentioned the Rodriguez decision last term. Rodriguez says what we said in our brief, that the Supreme Court of the United States retains the exclusive privilege of overruling its own decisions. And until that time --

QUESTION: Well, that said that unless they are directly applicable, didn't it?

MR. RANDOLPH: I don't believe there was a qualification. And I believe the lower court in Rodriguez had anticipated the overruling of Wilco, and the Court said that that should not have been done -- this Court retains the privilege of overruling its decisions. But --

QUESTION: Well, you don't mean that we have to take a case from every circuit on exactly that issue, do you?

MR. RANDOLPH: No, no. Once you've overruled --

QUESTION: Well, hasn't Scheiner made it very clear that Aero Mayflower was no longer law?

MR. RANDOLPH: Ah. Well, my point may be alluding -- I may be confusing the Court.

My point is this. That the petitioners in this case want to hold the Arkansas legislature to a higher standard, a different standard, than is applicable to the nation's judiciary, because they want the Arkansas legislature to anticipate the course of constitutional decision-making that this Court has engaged in under the Commerce Clause.

And if they anticipate incorrectly, as they did in 1983, the sanction is to open up the treasury of Arkansas to these petitioners and grant them refunds.

QUESTION: Well, I -- I take it you concede that Mr. Justice Blackmun had -- and this Court -- had the authority to order the escrow?

MR. RANDOLPH: That's an injunction order against the State of Arkansas and I think that under the line of decisions -- and I'll get to the Eleventh Amendment -- that injunctions order -- injunction orders giving perspective relief would be permissible.

QUESTION: And after that point any collection of the tax would have been illegal?

MR. RANDOLPH: After that point that is right, that is right.

And what that means is that if the elected representatives of the people don't combine the talents of a law professor and a soothsayer, then the people of the State of Arkansas are going to suffer either increased taxes --

QUESTION: Well, but is that fair, Mr. Randolph? Supposing there had never been a Scheiner case and they'd just filed the case in Arkansas, are you saying you would have won the case?

MR. RANDOLPH: Yes.

QUESTION: Oh, you don't think we would have applied the same principles we applied in Scheiner in this case if the Arkansas case had gotten there -- had gotten to us first?

MR. RANDOLPH: I'm confused. I think the Arkansas court was bound to adhere to Aero Mayflower. You're saying if -- if --

QUESTION: If it had --

MR. RANDOLPH: -- if the case had come up to the Supreme Court --

QUESTION: If there had been no Scheiner case and the Arkansas case had proceeded through the courts just as Scheiner did, and come to us as the first case presenting this flat tax issue, I think --

MR. RANDOLPH: Then we would have lost.

QUESTION: -- you would have lost. Yeah.

MR. RANDOLPH: Assuming --

QUESTION: And notwithstanding the fact that the Arkansas legislature didn't predict that.

MR. RANDOLPH: That's correct. That's correct. But --

QUESTION: Well -- well, don't the tax authorities in Arkansas have the duty and the authority not to collect an unconstitutional tax even though the legislature hasn't had the opportunity to reconvene?

MR. RANDOLPH: I think they have to follow the -- when a case is under advisement in this Court or the Arkansas courts, and there is a contention between parties about whether the tax is unconstitutional, I think the Arkansas authorities have to continue abiding by their legislative direction until the Court says otherwise.

QUESTION: Well, once Scheiner -- once Scheiner was decided, wasn't it clear that the tax was -- was illegal?

MR. RANDOLPH: It became clear. I don't think it was clear immediately and I think there's still some dispute, even to this day, about exactly what Scheiner held. The -- and I would get to the subperiod at the close of my argument if I may.

But I think the issue that Mr. Frey wants the Court to decide is coming in here under a verbal disguise. On the one hand, we're told the Court doesn't have to decide whether there is a federal right to a refund remedy, and, on the other hand, I notice the last time we were here Mr. Frey ended his argument by saying there is such a right.

And the Court doesn't even have to decide what -- who among petitioners is entitled to it or what the measure of relief is. All the Court has to decide is whether Scheiner is retroactive.

But when my opponents get to the point of explaining why Scheiner is retroactive, they find themselves in a state of perplexity, because their reasons why Scheiner is retroactive rely on the very points they say the Court doesn't have to decide.

Both of those reasons are what ought to be. And that "ought," which they frame up in terms of retroactivity, does not come out of the sky, I assume. It is derived from federal law.

Now, what they ignore in all these arguments, it seems to us, is -- and they raise fundamental questions about the relationship between state and federal governments and the role of this Court in that relationship.

It is, I think, fair to say, and the Court has said it many, many times, that it would be very unusual -- rare -- to find a federal monetary remedy imposed on state treasuries. That is a rare occurrence.

It is contrary -- and the Court has said this many, many times -- to the usual constitutional balance between state and federal governments. The state governments respect the immunity of the federal government, and the federal government respects the immunity of the state governments, and that's the balance.

The tradition is as old as the Constitution. Hamilton talked about it in the Federalist No. 81. And, I might add, if the arguments that we're hearing here today about how this Court ought to impose monetary liability on its state treasury of Arkansas had been made at the time of the Constitution, we might not have a Constitution. That's how critical that principle was.

This is why the Court has said, with respect to acts of Congress, that the Court will not engage in implication or inference or emanations when it determines whether Congress, which has the power under the Commerce Clause to upset that constitutional balance, has done so.

Congress has to say it directly on the face of the statute. And if it doesn't, then the Court's not going to infer that it has upset the balance and impose remedies on the state's monetary remedies.

Here, there is no clear statutory language. In fact, there is no statute at all. There had been, in the lower court -- in Arkansas the petitioners invoked 42 U.S.C. 1983. They can't here and they don't because the Court decided last term, obviously in Will, that that did not give them a right to collect money from -- for a violation of federal rights, including constitutional rights.

Now, there is, of course, the Commerce Clause, and we've heard a good deal about that. But if the English language retains any meaning -- and I don't think the petitioners are even going to contest this -- there is nothing in the Commerce Clause that clearly, unmistakably, unequivocally, provides monetary remedies against state treasuries.

It contrasts sharply, I might add, with the taking clause of the Constitution, which has been mentioned here. I think one can fairly say, and the Court has, by implication at least, that the just compensation clause does clearly, unequivocally provide a monetary remedy against states.

QUESTION: Mr. Randolph, I understood, though, that Arkansas had provided a remedy in this situation.

MR. RANDOLPH: Absolutely not. Arkansas -- and we have spelled this out in both briefs that we've filed in this case, Mr. Chief Justice -- does not allow suits to recover money against the treasury of Arkansas.

We have set forth in the brief on reargument at length the Claims Commission rules, which were a part of the exhibits in this case --

QUESTION: But the Supreme Court of Arkansas certainly didn't decide this case on that basis.

MR. RANDOLPH: That's not what petitioners thought. Petitioners -- let me be clear about this. This was their claim in Arkansas. Their claim here is entirely different than what was argued before the Arkansas Supreme Court.

One, they claimed only one thing: full refunds. None of this various and imaginative formulas. They did not come out with that claim until after the Arkansas Supreme Court denied their claim.

But more than that, they had two arguments. They said we want to -- we're suing under the illegal exactions statute. The state responded: you can't, that's sovereign immunity. They said earlier in the proceedings: we want an injunction, we wany an escrow because we can't get the money back once it goes into the treasury of Arkansas, we'd have to go through the Claims Commission which is a legislative arm.

But, two, nevertheless, it doesn't matter. Even if we don't get money as a result of the illegal exaction line -- and Arkansas has never held that you can recover money out of the state treasury -- we have a federal right to a remedy. That was their argument in the Arkansas court.

The Arkansas Supreme Court rendered a judgment, and the court is here -- California versus Rooney and other cases -- the court is here to review judgments. That judgment said you don't get refunds; we reject both your claims, necessarily reject both claims.

QUESTION: Well, but the opinion certainly didn't take the position that -- that you're taking. I'm not saying that your position -- you know more about Arkansas law than I do. But the opinion of the Supreme Court of Arkansas certainly didn't say that there is no way that you can get money out of the Arkansas treasury. They said that Scheiner was not retroactive.

MR. RANDOLPH: They did say that. There is no doubt about that. And this brings me to my point. But on the petition for a rehearing in light of the arguments that were made, petitioners said that the only basis on which the Arkansas court drew its line between the escrow order and the pre-escrow period was on the basis of sovereign immunity, and they argued against that. And I think that's right.

Where I was going is this. If -- if inferences and implication are not sufficient for acts of Congress to impose damage remedies, monetary remedies on state treasuries, still less are they insufficient when the federal judiciary is asked to impose monetary remedies against the state on the basis of the Constitution without any statutory foundation whatsoever.

Erie versus Tompkins was mentioned in the argument here. There is a line from Erie versus Tompkins. Except in matters governed by acts of Congress or the Constitution state law applies -- that's our position here. That this is not governed by an act of Congress and it's not governed by the Constitution.

And what -- everything that I said I think follows, ought to follow, from the assurances given 200 years ago, and I mentioned the Federalist No. 81, that this Court would not impose such liability on state treasuries.

The Court acted early on -- and this may be the best case petitioners have -- in Chisholm versus Georgia -- and did just that. Violated the assurances, and the Court knows what the consequence was. The consequence was the Eleventh Amendment.

QUESTION: Is the -- is the issue here the retroactivity of Scheiner? Is that one of the issues?

MR. RANDOLPH: We don't -- we think there's far more at stake in this case than merely toting up the Chevron factors. If we have to deal solely with retroactivity, we are happy to meet plaintiffs -- or, the petitioners -- on their playing field.

QUESTION: Well --

MR. RANDOLPH: But we think there's more at stake here, Justice White, than that.

QUESTION: Well, that may be, but the petitioners say Scheiner is retroactive and I -- and that's one of the issues they've presented to us.

MR. RANDOLPH: One of the -- one of the questions whenever --

QUESTION: And they say that that's the only issue there is, and if there is any other issue in the case, we're going to trundle back to Arkansas.

MR. RANDOLPH: With a -- consider how the opinion would read. The Supreme Court of the United States says Scheiner is --

QUESTION: How do you know?

MR. RANDOLPH: -- is retroactive. Scheiner is retroactive. We don't decide whether there is any federal principle that governs retroactive monetary awards against states. What we do say is it's retroactive because we think the Commerce Clause requires state legislatures to be deterred. We think the Commerce Clause requires compensatory relief. Here, Arkansas, take that judgment and you tell us what state law says.

In other words, don't decide all these issues, petitioners say, just decide that's what the law ought to be.

QUESTION: Well, Mr. Randolph, the Supreme Court of Arkansas -- and this is one sentence from its opinion, but it certainly seems to say something. On page 3(a) it says, "To hold the interstate truckers were entitled to all of their HUE tax payments, we would have to apply the Scheiner decision retroactively."

MR. RANDOLPH: Yeah.

QUESTION: Now, that certainly sounds to me as if they had felt the Scheiner decision was retroactive, they would have given something in the way of relief.

MR. RANDOLPH: I don't think that -- it may sound like that, but I don't think that follows.

QUESTION: Well, you know, it sounds like that to those who read the English language.

(Laughter.)

MR. RANDOLPH: I don't think that is exactly what was at stake and it may not be an artful way of phrasing it, but I think what they said is you have presented us with a claim, you want full refunds; we're not going to recognize it. The reasons are we hold it's not retroactive.

Whether they were doing that as a matter of state law, though, is not entirely clear. States around the country, as the Court may be aware, have adopted the Chevron test as a matter of state law. Arkansas has never explicitly done it. But that's certain --

QUESTION: Well, I guess all we have to decide is the retroactivity question.

MR. RANDOLPH: I'm sorry, I --

QUESTION: I guess all we have to decide is whether Scheiner is retroactive.

MR. RANDOLPH: But where I was going is, you cannot decide that question without dealing with the ought. And the ought is --

QUESTION: Why not?

MR. RANDOLPH: What -- if --

QUESTION: I mean, that's what the court below rested its opinion on. Why can't you just decide that and nothing else and say it's remanded?

MR. RANDOLPH: Because the process under Chevron that petitioners want the Court to engage in is deciding what the Commerce Clause requires in the nature of retroactive monetary relief. And they're right back -- when they make those arguments, they can't avoid it.

They say, and they've said it, that there is a federally compelled refund remedy. And that's what I am addressing.

If you look, for example, at page 28 of their opening --

QUESTION: Well, what --

MR. RANDOLPH: -- brief in this case --

QUESTION: What is --

MR. RANDOLPH: -- that's precisely --

QUESTION: What is required if a state clearly and knowingly enacts a law in violation of the Commerce Clause?

MR. RANDOLPH: An injunction.

QUESTION: And provides no monetary relief whatever for a taxpayer who pays the taxes under protest under that unlawful act while it's challenging the act?

MR. RANDOLPH: The -- my answer is the same answer that -- and I think I brought it with me although I don't have it out -- that Alexander Hamilton gave 200 years ago, that it's not the business of the federal judiciary to impose liability on the state government.

We can deal with hypotheticals, Justice O'Connor, and any time there is a sovereign immunity claim, that is always the argument against it -- what if the following occurred?

But what I am saying is, Arkansas is immune, Arkansas is not subject to having a federally-imposed remedy put on it by the Supreme Court of the United States.

QUESTION: And you say that we can't -- we cannot review the federal question even though -- even where the basis for its denying relief -- relief it's entitled to deny by hypothesis -- is the federal question.

MR. RANDOLPH: Well, I think you can review it.

QUESTION: Well, Mr. --

MR. RANDOLPH: What I --

QUESTION: Suppose -- suppose Arkansas says -- there are these federal securities laws under which certain -- other federal laws under which private actions have not been allowed. But we are going to allow private actions under those federal laws as a matter of state law. Okay?

And then, in adjudicating those claims, the state courts misinterpret the federal law; they get it all botched up. The state could argue, as I think you -- as I thought you were arguing here -- what difference does it make, it's up to us whom we -- whom we allow to get relief. If we want to do it on the basis of a mistake in interpretation of state law, that is ultimately a question of state law.

MR. RANDOLPH: Yes.

QUESTION: So -- so, butt out, Supreme Court, it's not your business.

MR. RANDOLPH: I think that --

QUESTION: Is that the position that you take?

MR. RANDOLPH: No, it's not. I think that misapprehends my argument.

QUESTION: All right.

QUESTION: My argument is that the questions of substantive federal law, whether a state tax violates the Commerce Clause -- those questions -- whether there is in a federal statute a right to sue. Those questions can be decided by this Court.

My position is limited solely to remedy. Just like Adelman versus Jordan is limited solely to remedy. You cannot impose a retroactive monetary award upon a state, and you can't do it directly under the Commerce Clause or indirectly on the --

QUESTION: Excuse me.

MR. RANDOLPH: -- basis of retroactivity.

QUESTION: Even though the denial -- you're saying it cannot base the denial of a substantive right upon misinterpretation of federal law, but it can base the denial of a remedy upon misinterpretation of federal law?

MR. RANDOLPH: If it does, the Court could give an opinion and say, as I would request the Court to do, that federal law is indifferent, that federal law is neutral, that federal law does not require or does not deny. And this, the Supreme Court says, is a matter of solely for state governments.

And I might add, if -- if in Union Gas, the Court applied stringent standards of interpretation, no implication to federal statutes, then the question here is whether the Supreme Court will apply those standards not only to --

QUESTION: Mr. --

MR. RANDOLPH: -- the Constitution but also really to itself rather than to Congress.

QUESTION: But, Mr. Randolph, those were -- those were cases in the federal judicial system. This is a case in the state system.

Unless you have -- adopt your argument about the Eleventh Amendment applies to appeals of state court. The Eleventh Amendment has nothing to do with this case.

MR. RANDOLPH: Unless we think it applies.

QUESTION: Yes. Unless you said --

MR. RANDOLPH: And my argument is that it applies.

QUESTION: -- because it's an -- but assume we reject that, as the Court implicitly has many times in the past, then there's nothing to your argument, is there?

MR. RANDOLPH: I don't agree that the Court has implicitly rejected it.

QUESTION: Well, I understand. But assume that they -- assume that we don't buy that, that the Eleventh Amendment applies -- deprives this Court of jurisdiction to review an appeal from a state supreme court. If we don't buy that argument, doesn't your whole argument fall?

MR. RANDOLPH: Oh, heavens, no. The Commerce Clause is still there. The Court is acting on negative implications when it even strikes down a state's tax statute, let alone --

MR. RANDOLPH: And -- well, if we get back to Bivens -- and that's where we're going in interpreting the Commerce Clause -- and that was the first brief I filed in this court -- then --

QUESTION: That was a federal case. That was another case.

MR. RANDOLPH: You cannot take the Commerce Clause, which says Congress has the power to regulate, and imply from that a right of action on the basis that somebody's constitutional rights were violated, and it must be assumed -- implied -- that the framers of the Constitution, in saying Congress can regulate, said what they really meant was the Supreme Court can open up state treasuries.

The two don't go together. And so you cannot use that whole line of implication cases to come to the conclusion, regardless of the Eleventh Amendment, that the Commerce Clause has a policy in favor of deterring state -- that the Commerce Clause has a policy of opening up state treasuries. It doesn't.

I -- I want to, if I may, as a practical --

QUESTION: But, see, the state supreme court didn't rely on any of this at all, did it?

MR. RANDOLPH: I'm sorry?

QUESTION: The Arkansas Supreme Court didn't rely on any of this presentation.

MR. RANDOLPH: No, but the argument is from me.

QUESTION: From their opinion the assumption is that we have a perfectly valid state procedure with state remedies when they're constitutional violations. We just don't think the remedy is appropriate here.

MR. RANDOLPH: No, I don't think they said that, Justice Stevens. I don't think they said that we have a perfectly appropriate system --

QUESTION: You kind of assume that from the way they write their opinion. They do not suggest any self-imposed limitations on their ability to give an appropriate remedy.

MR. RANDOLPH: And their judgment was, no refunds.

QUESTION: The judgment was $4.9 million of refunds, that's what their judgment was. Not no refund. And that, itself, is inconsistent with your notion that they won't give any refunds.

MR. RANDOLPH: Not when the money is deposited in the state treasury. That -- my position is when it's in the state treasury, there's no refunds. That's Adelman versus Jordan.

QUESTION: Thank you, Mr. Randolph.

Mr. Frey, you have three minutes remaining.

REBUTTAL ARGUMENT OF ANDREW L. FREY ON BEHALF OF THE PETITIONERS

MR. FREY: Thank you, Mr. Chief Justice.

I think Mr. Randolph has made this case a lot more complicated than it needs to be. In the brief in op, Arkansas got it right. They said at page 4 of their brief in op, "The Arkansas Supreme Court, however, did not reach questions of state law inasmuch as it did not need to answer state law questions on tax refunds in its opinion." They say it decided only the retroactivity of Scheiner. Now --

QUESTION: That was before they had Mr. Randolph.

MR. FREY: That was before, although --

(Laughter.)

MR. FREY: -- I have had the unpleasant experience in a case called Steigal versus the United States of having had an unfortunate concession made in a brief in op and the court refused to entertain a contrary argument on the merits.

In any event, I'm not worried about it because it seems to me the contrary argument is so --

QUESTION: Life evens things up.

(Laughter.)

MR. FREY: Well, let me -- because there is some potential confusion -- retroactivity and refunds are similar. That's because non-retroactivity is one ground for denying refunds, and it happens to be the ground that the Arkansas Supreme Court relied on.

Now, this is in fact a state cause of action in the first instance for refunds under the illegal exaction clause, refunds withheld because of a ruling on a question of federal law, the retroactivity of Scheiner.

Justice Scalia, you asked -- we cited at pages 9 to 12 of our reply brief a series of cases, Limbach versus Hooven and Allison, Three Affiliated Tribes against Wold Engineering, where you had a state cause of action. And there's a case called Standard Oil against Johnson in 316 U.S. which is a case involving a state tax in which they said the tax didn't apply in sales to the federal -- federal instrumentalities, and the question was whether an Army post exchange, under the state law, is a federal instrumentality. The Supreme Court reviewed that. It's a question of federal law.

Now, the reason the Arkansas Supreme Court drew the pre-escrow, post-escrow line has nothing to do with sovereign immunity. It had to do with their view that it was Justice Blackmun's opinion in granting the escrow that made it clear that the HUE tax was unconstitutional. That's why they drew the line at that point. That seems to me quite an untenable position.

Finally, we've gone through these two arguments and it seems to me not enough attention has been paid to the fact that there are a series of cases by this Court involving the right to tax refunds in which it was assumed by Justices no less than Holmes, Brandeis, Stone, and repeatedly said that there is some federal right to restitution of unconstitutional taxes.

And it seems to me that the burden of persuasion to the contrary is on our opponents who would wish to overturn those precedents. And I don't mean to be understood as saying that every pen -- that we have to get every penny back that was exacted. It depends on what was wrong with the tax and what the federal constitutional injury was that was suffered.

QUESTION: (Inaudible) that Scheiner is retroactive back to when the law was enacted? Or back to what date?

MR. FREY: Well, it happens that the law was enacted after -- after Complete Auto and after Commonwealth Edison. So, we would say it's -- it's fully retroactive.

QUESTION: Back to when?

MR. FREY: Back to the time -- we sued before the tax went into effect. So, it's --

QUESTION: Back to '81 then?

MR. FREY: -- back to the time the first dollar was collected.

QUESTION: Back to '81?

MR. FREY: '83.

QUESTION: '83. '83. Yeah.

CHIEF JUSTICE REHNQUIST: Thank you, Mr. Frey.

The case is submitted.

(Whereupon, at 2:20 p.m., the case in the above-entitled matter was submitted.)